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David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

To What Degree Were AIG’s Operating Insurance Subsidiaries Sound? (7)

Here is a table of deferred tax assets by OIS, for those having more than 10% of surplus in DTAs.Deferred tax assets are only valuable to the degree that you can earn income adequate to use them.The column “DTA payback” indicates the number of years of 2007 earnings (a relatively good year) that it would take to fully use the DTAs.

Now, it may no longer matter whether AIG ever pays taxes or not.It is largely “in one pocket, out of the other” with the government.But it does have some solvency and profit implications for the subsidiaries.

Subsidiary

DTAs/ Surplus

2008YE Surplus

DTA payback

American General L&A IC

152%

488

6.24

Am Int LIC of NY

133%

371

13.22

AIG LIC

131%

360

11.91

AIG Annuity IC

117%

3,045

15.53

First SunAmerica LIC

85%

544

17.37

The Variable Annuity LIC

70%

2,841

7.08

UG Residential IC of NC

61%

200

NA

American General LIC

50%

5,185

6.66

American Life IC

43%

3,900

2.93

AIG Premier IC

37%

144

151.43

SunAmerica LIC

35%

4,653

4.94

Hartford Steam Boiler IAIC

29%

443

1.65

AIG Centennial IC

24%

305

NA

AIG Hawaii IC

23%

64

NA

AIG SunAmerica LAC

20%

1,271

4.26

United Guaranty IC

19%

52

2.60

American Home Assurance Co

19%

5,702

1.81

AIU IC

18%

726

3.66

AIG National IC

12%

17

NA

Merit LIC

12%

406

2.00

DTAs as assets earn no income, and there is nothing that can be tapped for cash in a crisis.In insolvency, they are not very useful, because acquirers can only use them in very limited ways.Therefore, having a long DTA payback period, or a high amount of DTAs as a fraction of surplus is a negative for profitability and solvency.

This will prove to be more of a difficulty if prior profitability levels are not regained, which could be particularly difficult for the equity-sensitive OISs, where fees from variable products will likely be down for a while.Also, consider that the OISs as a whole may find that 2007 was an exceptionally good year for investments and underwriting, and may not be achievable any time soon.

About David Merkel

David J. Merkel, CFA, FSA, is a leading commentator at the excellent investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited David to write for the site, and write he does — on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, and more. His specialty is looking at the interlinkages in the markets in order to understand individual markets better.
David is also presently a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. He also manages the internal profit sharing and charitable endowment monies of the firm.
Prior to joining Hovde in 2003, Merkel managed corporate bonds for Dwight Asset Management. In 1998, he joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.
His background as a life actuary has given David a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that David will deal with in this blog.
Merkel holds bachelor’s and master’s degrees from Johns Hopkins University. In his spare time, he takes care of his eight children with his wonderful wife Ruth. View all posts by David Merkel →